Search This Blog

Bank failures will rise

SAN FRANCISCO - HERE'S a safe bet for uncertain times: A lot of banks won't survive the next year of upheaval despite the US government's US$700 billion (S$1 trillion) plan to restore order to the financial industry.

The biggest question is how many will perish and how they will be put out of their misery - in outright closures by regulators scrambling to preserve the dwindling deposit insurance fund or in fire sales made under government pressure.

Enfeebled by huge losses on risky home loans, the banking industry is now on the shakiest ground since the early 1990s, when more than 800 federally insured institutions failed in a three-year period.

That was during the clean-up phase of a decade-long savings-and-loan meltdown that wound up costing US taxpayers US$170 billion to US$205 billion, after adjusting for inflation.

The government's commitment to spend up to US$700 billion buying bad debts from ailing banks is likely to save some institutions that would have otherwise died, but analysts doubt it will be enough to avert a major shakeout.

'It will help, but it's not going to be the saving grace' because a lot of banks are holding construction loans and other types of deteriorating assets that the government won't take off their books, predicted Stanford Financial analyst Jaret Seiberg. He expects more than 100 banks nationwide to fail next year.

The darkening clouds already have some depositors pondering a question that always seems to crop up in financial panics despite deposit insurance: Could it possibly make more sense to stash cash in a mattress than in a bank account?

'It sounds like a joke,' said business owner Mauricoa Quintero as he recently paused outside a Wachovia Bank branch in Miami. 'But it sounds safer than the turmoil out there right now.'

Not as many banks are likely to fail as in the S&L crisis, largely because there are about 8,000 fewer today than there were in 1988.

But that doesn't necessarily mean the problems won't be as costly or as unnerving; banks are much larger than they were 20 years ago, thanks to laws passed in the 1990s.

'I don't see why things will be that much different this time,' said Mr Joseph Mason, an economist who worked for the US Treasury Department in the 1990s and is now a finance professor at Louisiana State University.

'We just had a big party where people and businesses overborrowed. We had a bubble and now we want to get back to normal. Is it going to be painless? No.'

With more super-sized banks in business, fewer failures could still dump a big bill on the Federal Deposit Insurance Corp, the government agency that insures bank and S&L deposits.

The FDIC's potential liability is rising under a provision of the bailout that increases the deposit insurance limit to US$250,000 per account, up from US$100,000.

Using statistics from the S&L crisis as a guide, Mr Mason estimates total deposits in banks that fail during the current crisis at US$1.1 trillion. After calculating gains from selling deposits and some of the assets of the failed banks, Mr Mason estimates the clean-up this time will cost the FDIC US$140 billion to US$200 billion.

The FDIC's fund currently has about US$45 billion - a five-year low - but the agency can make up for any shortfalls by borrowing from the US Treasury and eventually repaying the money by raising the premiums that it charges the healthy banks and S&Ls.

Through the first nine months of the year, 13 banks and S&Ls have been taken over by the FDIC - more than the previous five years combined.

The FDIC may be underestimating, or least not publicly acknowledging, the trouble ahead. As of June 30, the FDIC had 117 insured banks and S&Ls on its problem list. That represented about 1 percent of the nearly 8,500 institutions insured as of June 30.

Entering 1991, about 10 per cent of the industry - 1,496 institutions - was on the FDIC's endangered list.

Although the FDIC doesn't name the institutions it classifies as problems, this year's June 30 list didn't include two huge headaches - Washington Mutual Bank and Wachovia. Combined, WaMu and Wachovia had more than US$1 trillion in assets; the assets of the 117 institutions on the FDIC's watch list totalled US$78 billion.

Late last month, WaMu became the largest bank failure in US history, with US$307 billion in assets, nearly five times more, on an inflation-adjusted basis, than the previous record collapse of Continental Illinois National Bank in 1984.

The FDIC doesn't expect WaMu's demise to drain its fund because JP Morgan Chase agreed to buy the bank's deposits and most of the assets for US$1.9 billion.

Regulators dodged another potential bullet by helping to negotiate the sale of Wachovia's banking operations to Citigroup Inc. in a complex deal that could still end up costing the FDIC, depending on the severity of future loan losses.

On Friday, a battle of banking giants erupted when Wachovia struck a new deal with Wells Fargo without government help, and Citigroup demanded that it be called off.

The banking outlook looks even gloomier through the prism of Bauer Financial Inc., which has been relying on data filed with the FDIC to assess the health of federally insured institutions for the past 25 years.

Based on its analysis of the June 30 numbers, Bauer Financial concluded that 426 federally insured institutions are grappling with major problems - about 5 per cent of all banks and S&Ls.

About 15 per cent of the banks on Bauer's cautionary list have more than US$1 billion in assets. Not surprisingly, the troubles are concentrated among banks that were the most active in markets where free-flowing mortgages contributed to the rapid run-up in home prices that set the stage for the jarring comedown.

By Bauer's reckoning, the largest numbers of troubled banks are in California, Florida, Georgia, Illinois and Minnesota.

'It's important for people to remember that not all these banks are going to fail, just because they are on this list,' said Ms Karen Dorway, Bauer Financial's president. 'Many of them will recover.'

Mr James Barth, who was chief economist of the regulatory agency that oversaw the S&L industry in the 1980s, doubts things will get as bad as they did then.

'It's scary right now, but it's not as scary as a lot of people are making it out to be,' said Mr Barth, now a senior fellow at the Milken Institute, a think tank.

The tumult is creating expansion opportunities for healthy banks.

Industry heavyweights like JP Morgan, Citigroup and Bank of America have already rolled the dice on major acquisitions of financially battered institutions in hopes of becoming more powerful than ever.

Smaller players like Clifton Savings Bank in New Jersey are bragging about their relatively clean balance sheets to lure depositors away from rivals that are wrestling with huge loan losses. The bank, with about US$900 million in total assets, says just one of its 2,300 home loans is in foreclosure.

'There is going to be a flight to quality,' predicted Mr John Celentano Jr., Clifton Savings' chief executive. 'People are going to start putting their money in places that were being run the way things are supposed to be run: the old-fashioned way.' -- AP

Get link

Facebook

Twitter

Pinterest

Google+

Email

Other Apps

Comments

Popular posts from this blog

Hi all…I found this article on getting into Goldman Sachs. By the way, my professional specialization is management consulting for the financial services industry….so my life’s not only about slimming down and making money online…hahah and…I hope that makes me less bimbo-ish? hahaAnyway, for those who are fascinated about Goldman Sachs as “The Firm” to get into…the article below may prove useful to you :)====================================================Want to land a job at ‘The Firm’? Here’s how, by those who’ve done it before.1) Interview again and again (and again)Most front-office banking jobs involve a handful of interviews. Jobs at Goldman involve a dumper-truck full. We spoke to one former executive director at the bank, who joined as an associate back in the late 1990s. He had 47 interviews for the role.“Back in those days, there was a real feeling that hiring by consensus was the way to go,” he says. “Two people tried to veto me and I had to re-interview with them and conv…

By Shawn Langlois Published: Oct 31, 2017 1:35 p.m. ETSHARE101‘If you stick your head in the sand and pretend that this isn’t anything to be concerned about, you aren’t going to like what comes next.’ReutersWarren Buffett participates in the newspaper tossing challenge.Warren Buffett once described his favorite market indicator as “the best single measure of where valuations stand at any given moment” and that when the metric exceeds certain levels, like it did back in 2000, “you are playing with fire.”If that’s the case, investors might want to blow out that candle.Put simply, the Buffett indicator is the total market capitalization of all U.S. stocks relative to the country’s gross domestic product. When it’s in the 70% to 80% range, it’s go time. When it moves well above 100%, it’s time to tap the brakes.The metric sits at almost 139% at the moment, which is getting awfully close to the record 145% it hit during the peak of the dot-com bubble in 2000, the only other time the number …

The following article is based largely on the author’s summer internship experience at Banc of America Securities, as well as on interviews conducted with the other analysts at the bank.

Investment banking. For an eager job seeker, these two words conjure up magical images of skyscrapers silhouetted against the night sky, high-powered men in pin-striped suits making deals that change the course of the stock market, and glamorous lifestyles paid for by huge bonuses. Looking in from the outside, investment banking may indeed seem like a dream job. The mysterious and oh-so-enticing world of high finance lures the unwary with promises of big paychecks and even bigger opportunities, and hapless econ majors flock to Wall Street like bees to a honey pot. While many of them know what they are getting themselves into, having had internships or otherwise done extensive research, a fairly large portion enters investment banking with only a vague idea of what it entails or the sacrifices that…

A simple girl interested in sharing financial tips and news from the United States and Singapore. Many people focus on how to get rich. But some forget that their eventual objective is to be happy. And some also forget that the best way to be free from poverty and maintain wealth after getting rich is to be free from scams.